LONDON/NEW YORK Private equity firms are turning to deep-pocketed sovereign wealth and pension funds as they chase bigger deals, avoiding the often uneasy partnerships with rivals that marked boom-time deals.
Debt markets are hotting up with high-yield and loan investors ready to step in with billions of dollars of funding for deals like Polkomtel PTL.UL and, recently, Kabel Baden-Wuerttemberg EQTPRK.UL, should private equity win.
But the equity checks that come with such large targets also run into the billions and are too big for most buyout houses to foot, bankers and private equity executives said at the Reuters Global M&A Summit this week.
Large passive investors -- known in the industry as Limited Partnes or LPs -- enable them to boost their purchasing power without having to partner with competitors who often have contrasting views and agendas.
"In 06 if you wanted to put together $3 billion of equity you'd call one of the big firms," Garrett Moran, chief operating officer of Blackstone's (BX.N) private equity group, told the Summit in New York on Wednesday.
"Now the big LPs are saying 'call me first'," Moran said.
Large consortia or four and five buyout firms marked the multi-billion euro buyouts of the likes of chip-maker NXP (NXPI.O) and telecoms group TDC (TDC.CO).
While the returns have been high -- TDC investors have doubled their money and are still majority owners -- the headaches make large co-investors a more palatable option.
Trying to balance the interests of opinionated individuals at rival firms -- often at different points in their investment cycles -- is hard at the best of times, let alone during bumpy patches when swift and decisive action is needed, bankers and buyout professionals say.
"Having a sovereign wealth fund alongside you rather than another private equity house comes in handy," Matteo Canonaco, global sector head for financial sponsors and sovereign wealth funds at HSBC (HSBA.L) previously told Reuters.
"A sovereign wealth fund will let the private equity firm take the lead, in the main, and the process becomes a lot more nimble," Canonaco said.
In many cases, buyout firms have the resources to pay for a deal up front and syndicate equity privately afterwards.
When Blackstone bought the Busch Gardens theme parks business from AB Inbev, it syndicated some $300 million of the $1.1 billion equity check afterwards, the firm's senior managing director Joseph Baratta told the Summit in London.
But now buyout firms are calling co-investors earlier in the process because deals are bigger and they often don't want to put more than $1 billion of their own equity into a deal.
"I don't think there's a lot of appetite for putting multibillion dollar equity investments to work. To be honest I think the debt market has more appetite than the equity market," said John Coyle, head of Permira's New York office PERM.UL.
For the investor, the attractions are obvious -- they reduce their cost of capital by co-investing, said PAI Partners chairman Lionel Zinsou, which in turn boosts their returns.
But the risk for private equity is that the co-investors cannot complete due diligence and approve an investment in time.
"There are a lot of investors who like the theory of co-investing but, when pushed won't always be able to respond as quickly as a sponsor would like," James Pitt, partner at Lexington Partners, manager of a co-investment fund for Florida State and New York State Teachers, told Reuters previously.
But that's the nature of such deals, said HSBC's Canonaco.
"You are taking on the risk co-investors won't get there in the end and therefore you are not able to complete on your trade, even if you really think it's a great investment," said Canonaco.
And such partnerships are still largely untested.
"Will you see it where a limited partner stands beside you for $1 billion? That very much remains to be seen," said Blackstone's Baratta.
(Additional reporting by Natalie Harrison in London; Editing by David Cowell)